Kmarts Position in the Industry and the Renewal Strategy

Kmarts Position in the Industry and the Renewal Strategy

Kmart was the outgrowth of an organization founded in 1899 in Detroit by Sebastian S. Krege. The original 5 & 10 variety store operation -

low gross margins

high turnover

concentration on return-on-investment

1957 - new strategy forced by development of supermarkets and expansion of drug stores into general merchandise lines, which ate into the 'variety' store.

Harry B. Cunningham moved from operational responsibilities, groomed for presidency - assignment was to study existing retailing businesses and recommend marketing changes. Board of directors accepted Cunningham's recommendation of discount stores. Cunningham became president - birth of Kmart. The firm made an $80 million commitment in leases and merchandise for 33 stores before the first Kmart opened in 1962 in garden City, Michigan. As part of this strategy, management decided to rely on the strengths and abilities of its own people to make decisions rather than employing outside experts for advice.

In 1987, the 25th anniversary year of opening of the first Kmart store in America, sales and earnings of Kmart Corporation were at an all time high. The company was the world's largest discount retailer with sales of $25,627 million and operated 3,934 general merchandise and specialty stores.

In terms of sales volumes it was the third largest retailer in the US in 1999. Kmart is falling further behind in terms of sales revenue, assets, net income, net worth and market share compared to Wal-Mart it biggest competitor. Where Wal-mart has shown steady growth in all areas, Kmart has had some bad years and some even worse, Kmart is in a state where it is hoping to stave of bankruptcy.

Kmart is operating in a mature industry in which discount retailers have reached the peak of S curve. The various renewal strategies such as: diversification, joint venture and acquisitions have not worked for Kmart.

The position of Kmart is further analysed by using Porter's Five forces framework:

Michael Porter's Five forces

Relative positioning of competitors (Market share)

Wal-mart is seen as the leader in this industry and Kmart's performance can be compared for competitive analysis.

Sales

Kmart's sales between 1990 and 1999 increased from $32 billion to $37 Billion representing a growth of 10%

Wal-mart's sales over the same period were $32 billion to $165 billion representing a growth of over 400%.

Asset Growth

Kmart's asset growth of 15% compared to Wal-mart's 536% must be seen against Kmart's seen against Net income - Kmart's net income in 1990 was $756 million, peaking to $941 million by 1992, by 1991 it had come down to $403 million.

Net Income / net losses

In 1993, 1995 and 1996 Kmart had net losses

Over the same period Wal-marts net income grew from $1 billion to $5 billion

Kmart's net worth showed a growth of 40% (from $ billion in 1990 to $7 billion by 1999), over the same period wal-marts net worth over the same period moved from $5 billion in 1990 to $25 billion in 1999, a growth of 400%.

Intensity of Rivalry

In the retail industry the competition is very intensive among existing competitors. Competitors constantly change strategies to try and out perform each other. The maturity of the sector has resulted in a reduced number of players and is forcing focused niche segmentation.

The difficulty in a matured market is to find your target niche, whereas Wal-mart has focused cost-leadership (low prices), target corporation, No. 3 in sales, had staked out a niche as merchandiser of discounted upscale products, Kmart has no distinctive feature in the market ('stuck-in-the-middle').

New Entrants

Supermarkets and drug stores stocking wider ranges of merchandise have eroded discount store market share. Specialty or assortment retailers such as Toys "R" Us have established niche positions. New retail formats with lots of open spaces and offering wider ranges has also taken a slice of the pie.

Buyers

Management conceived the original Kmart as a conveniently located one-stop shopping unit where customers could buy a wide variety of quality merchandise at discount prices. One of Kmart's goals was not to attract more customers but to get the customer coming in the door to spend more. Customers were very careful how they spent their money and were perceived as wanting quality, a distinct contrast to the 1960's and early 1970's, which tended to have a 'throw-away' society. Customers want products that will last longer, "we'll have to pay more for them but still want them and at the lowest price possible. Consumers today are well educated and informed. Price remains a key consideration, but the consumers' new definition of value includes quality as well as price.

Suppliers

During 1999, Kmart signed agreements with SUPERVALU, Inc. and Fleming companies, Inc. under which they would assume responsibility for the distribution and replenishment of grocery-related products to all of Kmart stores. Kmart also maintained an equity interest in Meldisco subsidiaries of Footstar, Inc., operators of footwear departments in Kmart stores. Kmart like most large discount retailers tend to have interest in supplier companies so that they can control distribution and pricing. Discount retailers usually have a significant influence over suppliers without retail outlets, due to the volumes sold through stores.

Substitutes

Kmart were being challenged by several